Work Incentives and the Two-Earner Deduction

Abstract

One consequence of the two-earner deduction is to lower the marginal tax rate on the first dollar earned by secondary workers and to encourage their labor force participation. This study estimates the potential impact of the two-earner deduction on the probability of labor force participation by married women and tests the sensitivity of labor force participation levels to changes in the rate of deduction. Probit estimates of a labor force probability model suggest that the two-earner deduction increases the probability that a married woman work outside the home and that the effect is stronger the higher the deduction rate and the greater the after-tax income of the husband. Data for the study were drawn from the 1979 Michigan Survey of Income Dynamics.